Devious Taxation

The Washington, D.C.-based Tax Foundation does a yeoman's job of keeping track of how much we're paying in taxes and who's paying what. It turns out that American taxpayers worked this year from Jan. 1 to April 17, 107 days, to earn enough money to pay their federal, state and local tax bills. That statistic requires some clarification, and I ask my readers to help me examine it.

According to the Congressional Budget Office, Congress will spend $3.8 trillion this year, about 24 percent of our $15 trillion gross domestic product. But federal tax revenue will be much less, only $2.5 trillion, or 16 percent of the GDP. That means there's a shortfall of $1.3 trillion. Some people, including economists, say there's a deficit. That's true, but only in an accounting sense, not in any meaningful economic sense. Let's look at it.

If Congress spends $3.8 trillion out of this year's $15 trillion GDP, what must it do to accomplish that goal? If you said it must "find a way to force us not to spend $3.8 trillion privately," go to the head of the class. One way to force us to spend $3.8 trillion less is to tax us that amount, but we're being taxed only $2.5 trillion. Where does the extra $1.3 trillion come from? It surely doesn't come from the tooth fairy, Santa Claus or the Easter Bunny.

The fact of business is that if Congress spends $3.8 trillion of what we produce this year, it necessarily must force us to spend $3.8 trillion less privately this year. The most honest way to force us to do that is through taxation. Another way is to enter the bond market and make interest rates higher than they otherwise would be, thereby forcing us to spend less on private investment in homes and businesses. Then there is debasement of the currency through inflation, which is taxation by stealth.

A common but misleading argument is that future generations of Americans will pay for today's spending. Think about it. Is it possible for someone who has yet to be born to pick up the tab for what we do today? Pose the question another way. When we fought World War II, were the resources used and the sacrifices made to fight the war produced between 1941 and 1945, or were they produced and sacrificed in 1980, 1990 or 2000? Subsequent generations benefited from our fighting the war by being born into a free nation. Congresses profligate spending will burden future generations through making them heirs to less capital and, hence, less wealth.

The bottom line is that whatever Congress consumes this year is produced this year, not in 2020, 2030 or 2040. That means, in the real economic sense, the federal budget is always balanced.

Dr. Williams serves on the faculty of George Mason University as John M. Olin Distinguished Professor of Economics and is the author of 'Race and Economics: How Much Can Be Blamed on Discrimination?' and 'Up from the Projects: An Autobiography.'

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